How do you determine the appropriate weightings for each valuation method?

Valuation methods are tools that help you estimate the value of a business, project, or asset. There are many different valuation methods, such as discounted cash flow (DCF), market multiples, asset-based, and dividend discount model (DDM). Each method has its own advantages and limitations, depending on the context and purpose of the valuation. How do you determine the appropriate weightings for each valuation method when you need to combine them to get a more accurate and robust estimate? Here are some factors to consider.

1 The availability and quality of data

One of the first factors to consider is the availability and quality of data for each valuation method. Some methods require more data than others, such as historical and projected financial statements, market benchmarks, asset values, and dividend policies. You need to assess how reliable, consistent, and comparable the data is for each method. If the data is scarce, unreliable, or outdated, you may want to assign a lower weighting to that method or exclude it altogether.

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Clint Engler

CEO/Principal: CERAC Trader Strategies Inc. FL USA..... Currencies/Digital Assets, Economy, & Finance
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Determining valuation weights is like mixing a cocktail for your business worth. Each method throws in its own flavor: Income approach is the bubbly champagne, market approach the fruity liqueur, and asset approach the bitters. Here's your recipe: Data quality: Use freshest ingredients (reliable financials, relevant comps). Stale stuff gets a lower pour. Business characteristics: Is it a tech startup or a dusty bookstore? Some methods pair better than others. Valuation purpose: Selling? Borrowing? Each goal has its preferred blend. Your gut feeling: Like a pinch of salt, a dash of your judgment can enhance the final taste. Remember, it's your business cocktail, so adjust the weights to find the blend that sings to your financial taste buds.

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Reza Ari Wibowo

CFO at LinkAja, LinkedIn Top Strategy Voice, Strategy | M&A | Finance | FinTech
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It might be easy to answer if the quality and amount of data is different, however what if the amount of data is almost comparable? I would say more weight on DCF would be preferrable considering it take into account future growrh prospects, although DCF itself has its own limitation and heavily rely on the certain projection assumptions and logics. On the other hand, it is not preferrable to weight more comparables over DCF, under tue assumption there is no exact two companies have exactly the same operations, businesses, capital structure, etc.

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2 The characteristics and assumptions of the business

Another factor to consider is the characteristics and assumptions of the business you are valuing. Some methods are more suitable for certain types of businesses than others. For example, DCF is more appropriate for businesses with stable and predictable cash flows, while market multiples are more relevant for businesses with comparable peers in the same industry. You also need to consider the assumptions and sensitivities of each method, such as the discount rate, growth rate, terminal value, and multiples. You may want to assign a higher weighting to the method that reflects the most realistic and reasonable assumptions for the business.

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Mohamed ELRouby ACMA, CGMA, FPAC, CSCA, MBA, OKRP

AVP Global Commercial Finance at Pharmanovia l CFO Of The Year Innovation l FP&A | Finance Business Partner | Digital Transformation | Strategy | OKR I KPIs | Gartner Ambassador | FP&A Advisory Council AFP | Speaker I
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I totally agree that we should select the relevant valuation method to the company based on its growth lifecycle, based on the nature of the business, also based on the availability and the credibility of the data

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Reza Ari Wibowo

CFO at LinkAja, LinkedIn Top Strategy Voice, Strategy | M&A | Finance | FinTech
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Before judging multiples is easier in an industry with peers, it is also important to look at the profitability, capital structure, D/E Ratio, since even seemingly similar peers might have a totally different multiples due to different capital strategy. For example, a company with high fixed asset investment funded by debt might have similar stock price and EBITDA margin with other peers, but higher D/E and P/E ratio.

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3 The purpose and context of the valuation

The final factor to consider is the purpose and context of the valuation. Different valuation methods may yield different results, depending on the perspective and objective of the valuation. For example, if you are valuing a business for a potential acquisition, you may want to use a combination of DCF and market multiples, as they reflect both the intrinsic value and the market value of the business. However, if you are valuing a business for a bankruptcy proceeding, you may want to use an asset-based method, as it reflects the liquidation value of the business. You may want to assign a higher weighting to the method that aligns with the purpose and context of the valuation.

Determining the appropriate weightings for each valuation method is not an exact science, but a matter of judgment and experience. You need to consider the availability and quality of data, the characteristics and assumptions of the business, and the purpose and context of the valuation. By doing so, you can combine different valuation methods to get a more accurate and robust estimate of the value of a business, project, or asset.

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Reza Ari Wibowo

CFO at LinkAja, LinkedIn Top Strategy Voice, Strategy | M&A | Finance | FinTech
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After all, after doing valuations, someone might tend to determine valuation output based on his/hwr subjective judgment or “sense”. That is why many people says “valuation is a combination between art and science”.

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